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GCC Macroeconomic
Overview
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GDP Growth
External Sector
The macroeconomic soundness of the GCC economies have been
making them remarkably more resilient throughout the global
economic crisis. In the last years, the Gulf monarchies have enjoyed
high GDP growth rates, managed to control inflation, and boosted
Thanks to the oil-prices peak of 2011 and 2012, the current account
balance has showed record-high surplus, allowing the GCC states to
further increase their foreign assets investment through their
sovereign funds. Such external assets investment which should serve
as a sufficient cushion to avoid an immediate breakdown of the fiscal
balance in case of prolonged periods of weak oil prices
their fiscal policies and public current and investment spending.
Fiscal and Monetary Policy
Unemployment
The monetary policy has remained expansionary, in line with the rates
policy adopted by the currencies to which the Gulf currencies are
pegged. This allowed banks to increase the local credit to the private
sector, which has enjoyed good rates of growth. The remarkable
increase of current public spending has added new long-term weights
on the public budget and increased the breakeven prices. The
decrease of the oil-prices witnessed during the first half of 2013 raises
substantial uncertainties about the future sustainability of the GCC
countries’ public budgets.
The growth rate of the non-oil private sector has proved insufficient to
offset the growing number of young unemployed citizens, to whom
entrepreneurs usually prefer cheaper and often better-qualified
foreign workforce. Some Gulf monarchies have introduced organic
programs – notably Saudi Nitiquaat programme – to increase the
share of local workers in the private sector and further diversify their
economies.
Overview
In the last years, the GCC economies have been enjoying high growth rates. This
effect has been facilitated by historically high oil prices and expanded oil
production accompanied by expansionary fiscal policies. The main economic
institutions predict a more limited growth for this year and the next, due to
diminishing production after the peaks of 2011-2012 and decreasing oil prices.
Nevertheless, the general outlook remains positive, although the persistent
dependence on oil exports represents a significant risk for the macroeconomic
stability of the Gulf monarchies.
The real non-oil GDP is expected to drop from 7 percent in 2011 and from 6
percent in 2012 to 5,5 percent in 2013. The non-oil sector has witnessed
remarkable rates of growth in the last years but has proven to be still too
influenced by the oil-sector performances, especially in countries such as Saudi
Arabia, Qatar and Kuwait, where the share of oil&gas exports still exceeds by 80
percent the total exports.
Despite the prolonged expansionary fiscal policies and the record-low rates
implemented in the GCC countries – in line with those applying to the anchor
currencies for the region’s exchange rate pegs – the inflation rates remain low
due to the softening of food and real estate prices – the traditional inflation
drivers in the region – with the food prices in most cases held down by increased
subsidies and the real estate market still facing a supply overhang following the
2009 crisis.
The budget expansionary policies implemented in the last years to offset the
global economic crisis’ effects and the social turbulences sparked in 2011 by the
Arab Spring have put pressure on the national budgets of the GCC countries,
increasing the breakeven prices (the oil price level necessary to sustain the state
expenditures without incurring in a budget deficit). The significant increase of
current expenditure during the Arab Spring – mainly in the form of increased
salaries, subsidies and public jobs – has limited the resources available for
investment in economic diversification and in infrastructures projects.
Furthermore, the increased expenditures may pose significant risks in case of
prolonged stagnation of the global growth and the consequent additional drop
of the oil prices under the “red line” of 100 dollar per barrel.
In response to their exposure to oil prices uncertainties, in the past years the
GCC countries have built up significant precautionary buffers in the form of huge
amounts of external assets and low debt-on-GDP ratios. In 2012, the IMF
estimated at about 1,6 trillion dollars the total external assets retained by the
GCC countries in the world. Such buffers would easily sustain the national
budgets in case of oil prices drop in the short and medium term, while may
reveal insufficient in case of substantial and prolonged (a 30$ drop for more
than a year) oil price fall, with some countries such as Saudi Arabia, Oman and
Bahrain particularly exposed.
The Gulf moves Eastwards
The Gulf region has been economically and culturally tied with Asia for thousands of
years. After the Second World War, these ties witnessed a temporary backslash due to
the particular geopolitical context provided by the Cold War and the Gulf monarchies’
political and economic dependence on their relations with the West. In that period the
relations of the GCC states with the Asian continent were concentrated almost
completely with allies of the United States such as South Korea and Japan.
After the end of the Cold War, this situation has been slowly mutating. Since the
beginning of the 1990s, China and India have been increasing their oil consumption to
support their rapid economic growth. Especially China – which had been an oil net
exporter until 1993 – began to dramatically increase its consumption at double-digit
rates, a trend which has lasted for the last two decades and made Beijing the world’s
second largest oil importer after the United States, with 5,42 barrel-per-day in 2012.
The growing energy needs of the Asian giants have led these countries to rapidly
intensify and strengthen their ties with the big oil&gas producers of the Gulf while, on
the other side, the worsening of the Gulf monarchies’ ties with the West after the 9/11
attacks led their leaderships to look at Asia with a renewed interest. In the last 15 years,
economic ties and political ties have been rapidly strengthening each other: Indian
companies have been increasingly active in the GCC market, while a growing amount of
Gulf investments has been directed towards India, especially after the signature of the
Framework Agreement of Economic Cooperation between India and the GCC countries
in 2004. The relations with China have gone beyond the simple intensification of the
economic exchanges: a growing number of first-rank political contacts that have been
established over the last two decades and culminated in the state visit of the Saudi King
Abdallah bin Saud to Beijing, the first visit of a Saudi King to China and the first visit to a
foreign country by the than just appointed monarch.
In the last years, the GCC as a whole exported oil and petrochemical products to the
major Asian powers three and a half times as much as the US and the European Union
combined. Such trends are bound to increase in the coming years, sustained by the
stagnant oil consumption in the EU area due to the economic crisis and the decreasing
dependence of North America on energy commodities imports, caused by the growing
shale-gas exploitation in the US. The IEA forecasts a decrease in the US imports from the
Middle East of 1 million b/d (from 2.7 to 1.7) and of 300.000 b/d for the European Union
within 2018 while China’s and India’s imports are forecasted to increase by more than 1
milion b/d.
If, on the one hand, the current eastward trend of the GCC trade is meant to grow in the
forthcoming years, on the other hand, the GCC ties with the United States will remain
central in the military and security fields due to the US army’s overwhelming strategic
superiority and the central role of the US in preserving the stability of the market and,
with it, the stability of the still fragile world economy.
The Budget Risk
The GCC countries have been constantly increasing budget expenditures in the last
years. This peace was boosted in 2011 by the wave of protests that crossed the Arab
world. In order to prevent unrest in their countries, the Gulf monarchies’ leaderships
increased current and capital expenditures in different ways such as public sector wage
increases, new state jobs, increased commodities and unemployment subsidies. New
social housing plans have been launched, together with infrastructure projects for new
schools and new hospitals. The new current expenditures and the new rises in public
wages may curb investment and efforts in diversification plans and in the programs
aimed at increasing public sector employment for nationals, which anyway will remain
the main economic policy focus for the next years. Until now, the increased expenditures
have been offset by a steady rise in oil&gas prices on which most of the GCC budgets
depend. Almost all the budgets of the GCC have been further increased for 2013, in
some countries by as much as 20% year on year. The slowdown of the oil prices
forecasted for 2013-2014 may put under pressure the GCC balances, especially in the
countries whose budgets are more exposed . The surpluses in the balance sheets will be
narrowing in the all the Gulf monarchies, with some of them probably showing budget
deficits in the next years such as Oman, Bahrain and Saudi Arabia.
Inflation and Exchange rates
Inflation in the last years has been curbed by the high level of commodities subsidies and
the 2009 real estate bubble that decreased significantly the house prices, especially in
the UAE. Real estate prices have started to rise again but the risks of a new bubble are
significantly lower, due to the new set of bank and debt regulations which have been
implemented in most GCC countries. The low commodities prices caused by the
prolonged effects of the global economic crisis should support low inflation rates in the
next years (around 3-4%). Risks of inflation upward pressure may arise from the
programs aimed at increasing the private sector employment of nationals. The rising
costs that these measures may encompass for private companies are likely to create an
upward inflationary pressure on the consumption goods. The last two years have seen a
substantial increase in private debt in countries such as UAE and Oman, which have been
introducing several countermeasures to protect their credit systems. Loans have seen an
upward trend due to the low interest rates caused by the Federal Reserve policies on the
American dollar, to which all the GCC currencies are pegged. Despite the much-debated
project of a GCC monetary union (which Oman and the UAE have already quit) it is
difficult that concrete steps forward will be taken in the short-medium term.
The Unemployment Issue
The unemployment issue is crucial for the stability of the GCC economies. Their endowment
consists mainly of oil and gas, which are both finite and technologically replaceable resources.
In the last decades, the GCC countries have been pushing to diversify their economies,
developing high-technology sectors such as aerospace, renewable technologies and IT, which
all depend on high-skilled educated workforce. The downside of this process has been the
massive inflow of foreign workers, a phenomenon that along the decades has changed the
wages and skill composition of the GCC labour market. Foreigners amount to almost 70% of
the total employed workers in the GCC; they nearly monopolize the private sector, while the
nationals have been increasingly filling the public sector, whose wages are averagely more
than 50% higher. The wages disparity problem has exacerbated since the spark of the Arab
Awakening, during which the Gulf monarchies’ governments have increased salaries and
benefits of the public employees in order to defuse the risks of social unrest in their countries.
The impressive demographic growth which has affected the Gulf States in the last decades has
made the youth unemployment a serious issue for the long-term social stability of these
states. In order to absorb the young cohorts that are going to approach the labour market in
the coming years, the GCC economies have to create almost 3.300.000 jobs. Since it is
impossible for state budgets to keep on with the current trend of public-jobs creation, this
new workforce has to be absorbed by the private sector. In order to achieve this objective, the
GCC economies’ Unemployed/Private-Sector-Employed ratio (how many unemployed
nationals there are for every employed in the private sector) – which now is close to 80 due to
the overwhelming presence of foreigners – has to decrease dramatically. To tackle this major
issue, some GCC countries have introduced special labour legislations aimed to substitute
foreign workforce with locals. The main example has been the Nitiquaat programme
introduced by the Saudi authorities, which has the explicit aim of “Saudinaizing” the national
labour market. The authorities have been adopting measures such as setting compulsory
minimum levels of national employees in the private firms’ workforce or strongly tackling the
illegal foreign workers dwelling the kingdom. Nevertheless, the programme has had mixed
results until now. The main problems are related to the much higher costs of the national
workforce and its degree of education. The education system needs deep reforms to prepare
the national youth to enter the labour market with competitive skills.
In general, economy has to progress along the path of diversification to develop sectors that
are much more labour intensive than the oil&gas. Nowadays the GCC economy has to grow by
the impressive average of 6% per year to create the necessary number of new jobs. This is due
to the scarce employment elasticity of the economic structures, a problem affecting every Gulf
State at different degrees, depending on their achievements in their economic diversification
programmes.
GCC Economic Growth
12
10
8
6
4
2
Source: NBK
0
-2
-4
-6
2007
2008
2009
2010
2011
2012
2013
GCC economic growth
4.2
5.7
0.3
4.8
8
4
5.2
Oil&Gas Growth
-2.9
3.8
-4.2
4.3
6.8
0.7
0.5
Non-Oil Sectors Growth
9.7
7
3.3
5.1
8.7
6
7.9
Current Account and Trade Balance
40
35
30
25
20
15
Source: IMF
10
5
0
2007
2008
2009
2010
2011
2012
2013
Current account balance (% Gdp)
18.9
21
6.7
13.2
23.3
19.7
19.7
Trade balance (%Gdp)
17.8
34.4
24.2
30.2
37.6
34.2
34.1
GCC Public Domestic Debt ($Bn) 2004-2010
250
200
150
100
Source: Gulf Investment
Corporation
50
0
Public Domestic Debt ($Bn)
2004
2005
2006
2007
2008
2009
2010
192
157
139
118
118
141
138
GCC Unemployment
30
25
20
15
10
Source: Gulf Investment
Corporation
5
0
Unemployment
Youth Unemployment
Saudi Arabia
10.5
Bahrain
8
Qatar
3
UAE
14
Kuwait
6
Oman
8
30
28
3
24
12
23
Breakeven prices ($)
127
Iran
99
GCC media
94
Arabia Saudita
53
Qatar
0
Source: APICORP
20
40
60
80
100
120
140
Destinations of Saudi Arabia's Exports
10%
13.7%
China
US
13.4%
Japan
South Korea
India
Others
41.6%
13.9%
10.2%
7.2%
Source: Eurostat
Europe
Oil Consumption
14000.0
12000.0
10000.0
8000.0
6000.0
4000.0
2000.0
0.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Cina
1400.5
1353.3
1394.8
1805.8
2448.9
2598.9
2904.7
3264.0
3577.9
4081.9
4753.6
UE 27
11955.9
11959.1
11676.5
11973.3
12436.0
12410.1
12273.1
12092.8
12180.5
11229.4
11248.2
USA
9070.5
9328.5
9140.2
9664.9
10087.6
10125.9
10118.0
10031.2
9783.3
9012.8
9213.3
India
1336.8
1574.1
1609.8
1788.7
1912.0
1938.2
2156.0
2412.3
2556.7
3185.2
3271.9
Gulf oil exports change forcast for 2018 (b/d)
Gulf oil exports changes forcast for 2018 (b/d)
Other Asia
China
-0.9
OECD Pacific
-0.3 OECD Europe
-1.0
Source: IEA
US
0.8
0.3
GCC Budget Balances 2009-2014
2014
2013
2012
2011
2010
2009
-15
-10
-5
0
5
10
15
20
25
30
35
Bahrain
2009
-5.2
2010
-4.8
2011
-0.3
2012
-3.5
2013
-4.5
2014
-4.5
Qatar
15.2
2.9
8.6
9.1
8.2
7
Oman
0.6
3.6
7.1
5
3
2
UAE
-11.2
-5.4
-8
6
4
2
Kuwait
21.1
15.4
29.8
25
20
18
KSA
-6.1
5.1
13
14
7
3
Source: NBK
Inflation in the GCC 2008-2014
2014
2013
2012
2011
2010
2009
2008
-10
-5
0
5
10
15
20
2008
3.5
2009
2.8
2010
2
2011
-0.4
2012
1.2
2013
2.6
2014
2.1
Qatar
15
-4.9
-2.4
1.9
1.9
3
4
Oman
12.6
3.5
3.3
4
2.9
3.3
3.3
UAE
12.3
1.6
0.9
0.9
0.7
1.6
1.9
Kuwait
10.6
4
4
4.7
2.9
3.3
3.8
KSA
6.1
4.1
3.8
3.7
2.9
3.7
3.6
Bahrain
Source: IMF
Jobs to be created in the decade 2010-2020 ('000)
Bahrain; 119,3
Kuwait; 242,3
UAE ; 853
Oman; 347,4
Qatar; 217,2
KSA; 1512,8
Tot: 3293
Source: Gulf Investment Corporation
Source: Gulf Investment Corporation
Unemployed/Private Sector Employed Ratio
Source: Gulf Investment corporation
90
80
70
60
50
40
30
20
10
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Unemployed/Private Sector Employed 14.86
14.72
16.14
62.33
69.06
70.59
75.98
69.05
63.55
82.33
77.38
Employment elasticity
1.6
1.4
1,27
1,34
1.2
1
0,98
0,88
0,82
0,71
0.8
0.6
Employment elasticity
0,48
0.4
Source: ILO, EIU
0.2
0
Bahrain
Kuwait
Oman
Qatar
KSA
UAE
GCC